Will Eaton Deliver A Surprise?

| About: Eaton Corp. (ETN)
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Summary

Eaton's business was slow in 2015.

The company is about to release its Q4'15 earnings in the next few days.

Would there be signs of growth towards 2016?

Eaton Corp. plc (ETN) is a global, diversified, industrial manufacturer of electrical systems and components for power distribution and control, fluid power systems for industrial, mobile and aircraft equipment, intelligent truck and train systems; as well as automotive-related components.

The slowness in global economy growth had a significant impact on Eaton's business, financials and therefore on the stock's performance.

In the recent year, the stock faced a drop from the levels of $70-75 to sub-$50, and it had hard time to recuperate since.

Eaton Corp. is expected to report earnings on February 3rd before market open and as an ETN stockholder, I would like to see some signs that the company has a path to move back to deliver growth.

Unfortunately, these things take time.

The EPS

According to Yahoo Finance, based on 24 analysts' analyses, the consensus EPS forecast for the quarter is $1.1, which represents a 13% drop year over year compared to the reported EPS for the same quarter last year which was at $1.27.

The Revenue

Revenue is also expected to come lower than last year at an average of $5.10B. Compared to the $5.56B from Q4'14, that is an 8% drop year over year. Though it is a reduction, it would actually be slightly better compared to the 9% drop which was showcased between Q3'15 and Q3'14. I suspect that the Forex challenge would continue to be a big driver for revenue degradation in Q4'15, as it was in the first three quarters of the year.

On a yearly basis, if achieved the consensus $5.1B of revenue, Eaton's yearly revenue would be at $20.9B which is 8% lower compared to the $22.6B of revenue the company generated in 2014. This is way lower than the -1% guideline the company delivered in the October 2015 meeting.

Operating Margins

In that same October meeting, the company expected its overall operation margins for the year to be at ~15%. During the first three quarters of the year, the operating margin % was at ~11% in average. It would be very surprising to see how the company hits its yearly goal of 15%.

The debt

Eaton's debt continued to shrink over time following the big acquisitions the company has made during the recent years. The long-term debt, which in 2013 was at $9.8B, reached $7.8B by the end of Q3'15. The company took a commitment to pay ~$0.6B of its debt in Q4'15 and it would be interesting to see whether it was indeed materialized and what were the implications to the debt to equity indicator.

The Dividend

If it achieved the $1.1 EPS in Q4'15, the yearly EPS would be at ~$4.2. This is the lower end of the expected yearly EPS range which was set to be between $4.2 and $4.3.

In terms of dividend payout ratio, it still seems that the dividend is sustainable as the dividend for 2015 was expected to be at $2.2. That is a 52% payout ratio, hence it is safe. Could there be a dividend hike in Q1'16? The jury is still out on this one.

The 2016 Outlook
Back in the October meeting, the company was focused mainly on cost reductions. The potential benefits the company alluded to were driven by the restructuring programs it pushed for in order to reduce the yearly spending and the long-term debt. I hope that in the coming earnings release, there would be some signs of growth.

Conclusions:

In the upcoming Eaton's earnings report, I would like to find signs of growth especially in the top line. The company is focused on efficiencies and cost reduction, but growth in the top line would be a good indication that Eaton has found the path for growth which would maintain its position as a dividend power machine company, just as it was during the recent six years.

Disclosure: I am/we are long ETN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.